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When venturing into the world of home ownership, first-time buyers often find themselves having to make important, fast decisions in what feels like a surreal situation — after all, it might have only been a few weeks since owning a home seemed more like a far-off daydream than an immediate reality. A few common sense tips will help you navigate these unfamiliar landscapes as you move towards one of the biggest financial decisions of your life.

1. Get pre-approved
Though a pre-approval isn’t a guarantee that you’ll get a mortgage when you’re find a property, having one can give you a firm grasp on what you can afford before you start looking. A pre-approval from your bank or lender will save you time by narrowing your search to a more precise selection of homes, and this, in turn, can protect you from the all-too-common disappointment that follows setting your heart on a house you can’t afford.

2. Don’t expect your standards of living to change
It’s bound to happen: you see a house that maxes out your budget, but you imagine you can make it work by cutting out things like morning coffees, cellular data and cable TV. Remember, ‘roughing it’ for the sake of your house quickly loses its charm, and you’ll soon regret the lack of wiggle room for things like new furniture, redecorating, or unexpected repairs. Don’t regret your first home — avoid becoming ‘house poor’ by staying below the upper limit of what your bank is willing to lend you.

3. Make a list and check it as many times as it takes
Each property you consider will have its own unique combination of pros and cons, and going through them can feel a little like comparing apples to oranges. Don’t expect to stay clear-headed when the house with the poor walking score has the kitchen of your dreams; instead, stay on track by building a list of “must haves” and “nice to haves.” Though your list might evolve over time (especially if the “must haves” are rare for your price range), having a set of self-imposed guidelines can keep your search on course when you’re feeling overwhelmed by options.

4. Don’t confuse “first home” with “forever home”
Most first-time buyers start out a little starry-eyed, imagining that new home will be stylish, spacious, efficient … basically, everything they’ve been dreaming of. In reality, being able to afford a house that has everything you want is pretty rare in the first go-round, which can make you feel so discouraged you start closing yourself off to the available options. Remember, your ‘starter home’ doesn’t have to meet all the criteria of your ‘dream home,’ and the equity you’ll build for the next few years will get you closer to your goal.

With so much new information to absorb, steps to take, and decisions to make, buying a first home can feel like a rollercoaster ride. It’s important not to lose your head throughout all of it. Taking a few steps to keep your expectations rooted firmly in reality can help you glide through the process and feel confident in your final decision.

Submission to the House of Commons Standing Committee on Finance:
Canadian Real Estate Market and Homeownership
February 2017

Gary Simonsen
Chief Executive Officer

EXECUTIVE SUMMARY

Thank you, Mr. Chair. The Canadian Real Estate Association would like to thank the committee
for the opportunity to participate in the study on the Canadian Real Estate Market and Home
Ownership. CREA represents over 120,000 REALTORS® from across the country. As one of
Canada’s largest single-industry associations, we represent real estate brokers and agents, as well
as home buyers and property owners throughout the country.

Canada’s housing market is a key component of Canada’s overall economic stability and an
important generator of jobs and economic security for the middle-class. In 2016, each home sale
generated over $52,000 in spin-off spending. This translates to one job for every three home sale
transactions. In addition, resale housing transactions through the Multiple Listing Service
(MLS®) generated more than $28 billion in consumer spin-off spending and created more than
198,000 jobs in 2016.

Most Canadians see their home as a source of pride, satisfaction and accomplishment not to
mention a safe environment in which to raise their family and create happy memories. This is
why CREA has been advocating for the indexation and modernization of the Home Buyers’ Plan
(HBP), a program that allows Canadians to use their RRSP savings to purchase their first home.
We were pleased to see that the plan was included in multiple election platforms in 2015 and we
will continue to work with the government to ensure it remains a valuable program for all
Canadians.

As all real estate is local, it is important to note that the housing markets in and around Toronto
and Vancouver have different realities compared to elsewhere in Canada – the vast majority of
which are either well balanced or amply supplied. It is crucial to consider and reflect upon
different areas of the country when enacting policy that affects a wide swath of housing markets,
including places not targeted directly by the government’s recent regulatory measures.
Consumer demand in markets like Toronto and Vancouver is at an all-time high and there is a
significant shortage in housing supply. Various factors have caused an imbalance on the supply
and demand of homes which in turn drives up prices significantly. As this is a complex matter,
CREA is encouraged that the federal government created a working group comprised of federal
officials as well as provincial and municipal representatives. The three levels of government will
be able to focus on the challenges in each region and recognize the local reality for all markets.
While the provincial governments in Ontario and British Columbia have recently introduced
measures to assist first-time home buyers, the federal government has tightened national
mortgage rules, thereby lessening affordability for those seeking to enter the market. If the
federal government continues to tighten mortgage rules, will this force the provincial
governments to implement further programs to assist-first time-time homebuyers? CREA and its
REALTOR® urges all levels of government to continue to work together to reach a healthy,
competitive and stable housing market. We are prepared to share analysis of local housing
market trends and apply our knowledge and data to help the government policy makers at all
levels better understand how changes to housing market regulations may affect communities
across Canada.

Assistance for first-time homebuyers should be top-of-mind for all levels of government. Firsttime
homebuyers need support to overcome the obstacle of saving for a downpayment in order to
reach their homeownership dream. The plan’s purchasing power is steadily declining and has
become less valuable due to the increase in home prices. We recommend the plan be indexed to
inflation to preserve its purchasing power and continue to help first-time homebuyers attain
homeownership.

Easing affordability concerns is a key principle of the plan and Canadians should be able to
benefit from this program more than once. Canadians and their families who face sudden life
changes such as job relocation, the death of a spouse, a marital breakdown or the decision to
accommodate an elderly family member may need support to maintain homeownership.
Expanding the plan for Canadians to use their RRSPs as a zero-interest self-loan is a fiscally
responsible way to support families through a difficult period of change.

In the last eight years, the federal government has implemented six rounds of changes to tighten
the rules for new government-backed insured mortgages and contain risks in the housing market.
These measures have been implemented over a short period of time and their full impact has yet
to be determined. We recommend the government take a pause to fully evaluate the cumulative
impact of the changes before looking at implementing additional measures.

Thank you for your time, I would be pleased to answer any questions the Committee might have.

There are 9 million Canadian millennials, representing more than 25% of our population. Born between 1980 and 1999, the eldest are in the early stages of their careers, forming households and buying their first homes. Buying a home is a daunting process for anyone, but especially so for the first-time home buyer. This is the largest and most important financial decision you will ever make and it should be done with the appropriate investment in time and energy. Making the effort to be financially literate will save you thousands of dollars and assure you make the right decisions for your longer-term financial security.

1. Don’t rush into the housing market. (can you believe that I am saying that as a Realtor?)
Do your homework and learn the basics of savings, credit and budgeting. Lifelong savings is a crucial ingredient to financial prosperity. You must spend less than you earn, ideally saving at least 10% of your gross income. Do your savings automatically, having at least 10% of every paycheck put into a savings account. Hopefully if you don’t see the money, you won’t spend it. Contributing to an RRSP, especially if you are fortunate enough to have any matching funds from your employer, is essential.

The Tax Free Savings Account (TFSA) is an ideal vehicle for saving for a down payment and now you can contribute as much as $10,000 per year.

You also need to establish a good credit record. Lenders want to see a record of your ability to pay your bills. As early as possible, get a credit card and put your name on phone and utility bills. Pay your bills and your rent in full and on time. Do not run up credit card lines of credit. The interest rates are exorbitant and the only one who benefits is your bank. Keep your credit card balances well below their credit limit.

Do a free credit check with Equifax and TransUnion once per year to learn your credit score and to see if there are any problems. They do make mistakes and sometimes put someone else’s problems on your report. Or you might think that the problem you had is all taken care of and you discover that the company you dealt with did not inform these credit places of the situation. I have done this more than once for myself and it can be a pain, but you are responsible for your own credit report and it’s good to know what info these companies have about you and if it needs updating. These companies track all of your credit history, which includes student loans, car loans, credit cards and cell phone bills. Then they grade you based on your responsible usage and payments.

Budgeting is also essential and it is easier than ever with online apps. You need to know how you spend your money to discover where there is waste and opportunity for savings. The CMHC Household Budget Calculator or any other online budget calculator helps you take a realistic look at your current monthly expenses.

2. Make a realistic projectory of your future household income and lifestyle and understand its implications for choosing the right property for you.
Millennials are likely relatively new to the working world. Lenders want to see stability in employment and you generally need to show at least 2 years of steady income before you can be considered for a mortgage. This also applies if you have been working for a few years in one career and then decide to change careers to something completely different. Lenders want to see continuous employment in the same field. If you are self-employed, it is more challenging, and you need professional advice on taking the proper steps to qualify for a mortgage.

Assess the stability of your job and the likely trajectory of your income. Millennials will not follow in the footsteps of their parents, working for 1 employer for 40 to 50 years. In today’s world, no one has guaranteed job security. Take a realistic view of your future. Will your household income be rising? Will there be one income or two? Are there children in your future? Will you remain in the same city?
The answers to these questions help to determine how much space you need, the appropriate type of residence, its location and the best mortgage for you. Financial planning is key and it is dependent on your goals and expectations.

3. This is not a Do-It-Yourself project: build a team of trusted professionals to guide you along.
You need expert advice. The first person you should talk to is an accredited mortgage professional. There is no out-of-pocket cost for their services. Indeed, they will save you money. These people are trained financial planners and understand the ever-changing mortgage market. Take some time with them to understand the process before you jump in and find your head spinning with all the decisions you will ultimately have to make. They will give you a realistic idea of your borrowing potential. Before you fall in love with a house or condo, make sure you understand where you stand on the mortgage front. Mortgages are complex and one size does not fit all. You need an expert who will shop for the right mortgage for you. There are more than 200 mortgage lenders in Canada and they will compete for your business.

It is a very good idea to get a pre-approved mortgage amount before you start shopping (mandatory in my books). Just becuase you work with someone at a similar job, this doesn’t mean that you will qualify for the same amount of mortgage as your co-worker. One of you might have more debt or more savings than the other, or issues with your credit report. Getting pre-approved is a more detailed process than just a rate hold (where a particular mortgage rate is guaranteed for a specified period of time). For a pre-approval, the lender will review all of your documentation except for the actual property. There is far more to the correct mortgage decision than the interest rate you will pay. While getting the lowest rate is usually the first thing on every buyer’s mind, it shouldn’t be the most important. Six out of ten buyers break a 5 year term mortgage by the third year, paying enormous penalties. These penalties vary between lenders. The fine print of your mortgage is key and that’s where an expert can save you money. How the penalty for breaking a mortgage is calculated is key and many lenders have significantly more consumer-friendly calculations than the major banks. A mortgage broker will help you find a mortgage with good prepayment privileges.

The next step is to engage a great real estate agent. hint hint

The seller pays the fee and a qualified realtor with good references will understand the housing market in your location. Make sure the property has lasting value. Once you find the right home, you will need a real estate lawyer, a home inspector, an insurance agent and possibly an appraiser. Make any offer conditional on a home inspection and financing, among other conditions that your realtor will help you with.

4. Down payments, closing costs, moving expenses and basic upgrades need to be understood to avoid nasty surprises.
The size of your down payment is key and, obviously, the bigger the better. You need a minimum of 5% of the purchase price and anything less than 20% will require you to pay a hefty CMHC mortgage loan insurance premium, which is frequently added to the mortgage principal and amortized over the life of the mortgage as part of the monthly payment. Your lender will want to know the source of your down payment. Many Millennials will depend on their parents to top up their down payment. The down payment, however, is only part of the upfront cost. You can expect to pay from 1.5 to 4% of the purchase price of your home in closing costs. These costs include legal fees, appraisals, property transfer tax, GST on new properties, home and title insurance, mortgage life insurance and prepaid property tax and utility adjustments. These can amount to thousands of dollars. Don’t forget moving costs and essential upgrades to the property such as draperies or blinds in the bedroom.

5. Test drive your monthly housing payments to learn how much you can truly afford.
Affordability is not about how much credit you can qualify for, but how much you can reasonably tolerate given your current and future income, stability, lifestyle and budget. Most Millennials underestimate what it costs to run a home, be it a condo or single-family residence.

The formal qualification guidelines used by lenders are two-fold:
1) your housing costs must be no more than 32% of your gross (pre-tax) household income; and,
2) your housing costs plus all other debt servicing must be no more than 40% of your gross income. Lenders define housing costs as mortgage payments, property taxes, condo fees (if any) and heating costs.
3) But homes cost more than that. In your planning, you should also other utilities (such as energy, power and water), ongoing maintenance, home insurance and unexpected repairs. Taking all of these costs into consideration, the 32% and 40% guidelines might well put an unacceptable crimp in your lifestyle, keeping in mind that future children also add meaningfully to household expenses and 2 incomes can unexpectedly turn into 1.
The best way to know what you can afford is to try it out. Say, for example, you qualify for a mortgage payment of $1400 per month and adding property taxes and condo fees might take your monthly housing expense to $1650. A far cry from the $500 you pay now to split a place with 3 roommates. Start making the full payment before you buy to your savings account and see how it feels. Do you have enough money left over to maintain a tolerable lifestyle without going further into debt? Yes it might be a bit tight, but if you really want to be a home owner, you will make some sacrifices for that goal. Keep in mind that this is not a normal interest rate environment. Don’t over-extend because there is a good chance interest rates will be higher when your term is up. Do the math (or better yet have your broker do it for you) on what a doubling of interest rates 5 years from now would do to your monthly payment. A doubling of rates may be unlikely, but it makes sense to know the implication.

Do Your Calculations Look Discouraging?
If so, here are some things you can do to improve your situation:
Pay off some loans before you buy real estate.
Save for a larger down payment.
Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
Lower your home price — remember that your first home is not necessarily your dream home.

Footnotes:
People break mortgages because of:
– job change,
– decision to upsize or downsize,
– decision to change neighbourhoods,
– change in family status (marriage/divorce)
– to refinance.
The last thing you want to discover is that discharging a $400,000 mortgage and only being 3 years into a 5 year term is going to cost you $15,000.

Lenders now also assess you on a 5 year term, presently at 4.64% even though you might be getting a lower interest rate on your mortgage.

Thanks to many mortgage professionals of Dominion Lending Centres who contributed to this report.

Take note of the First Home Plan that provides an interest-free, repayable loan of up to $10,000 for you to use towards a down payment on your first home.

If you live in (or will be moving to) Saskatchewan, have Graduate Retention Program tax credits available and are going to buy a single family house, duplex, townhouse, mobile or condo unit for your primary residence in Sask, then you are possibly eligible.

The data included on this website is deemed to be reliable, but is not guaranteed to be accurate by the Association of Regina REALTORS® Inc.. The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. Used under license.